London: A trio of top European banks showed bad debts are ratcheting up as economies worsen and unemployment rises, although investor optimism ahead of US bank stress test results drove shares to year highs.
Results from the stress tests due later on Thursday are expected to show Bank of America, Citigroup and others need to find billions of dollars. But the prospect that banks are building cushions to prepare for more bad times has helped drive bank stocks higher around the world.
However, part-nationalised UK lender Lloyds Banking Group sent its shares plunging after warning that bad debts on corporate loans were rising significantly and reiterating it expected a loss in 2009.
France’s Societe Generale slumped to a surprise loss in the first quarter as higher-than-expected writedowns and provisions hit the bank’s earnings.
And Britain’s Barclays reported a 79% rise in first-quarter impairments, although that was offset by a record start to the year for its investment bank arm.
By 2:45pm, Lloyds shares slumped over 13%, SocGen fell 6% and Barclays stood less than 1% firmer. The DJ Stoxx European bank sector index, which hit a 2009 high earlier, edged down to 184.58, a rise of 2.7%.
A sharp surge by US bank stocks on Wednesday underpinned shares.
After stress tests on the top 19 US banks, designed to ensure they will have enough capital to protect them from deep economic downturns, regulators have told Bank of America it needs $34 billion and Citigroup that it needs $5 billion, according to people familiar with the matter.
Those capital shortfalls are larger than analysts had expected, but bank shares soared as investors welcomed clarity over how well the industry will cope with a deepening recession.
Lloyds has suffered billions of pounds of losses from the portfolio of HBOS, the troubled lender it bought earlier this year. It said it expected further corporate defaults in 2009, notably in commercial real estate portfolios in Britain and Ireland.
As a result, it expects corporate impairments in 2009 to be more than 50% higher than in 2008, when combined Lloyds/HBOS corporate loans were between £9 billion and £10 billion. The group also continues to expect retail impairment levels to rise significantly this year.
Barclays said impairment charges and other credit provisions jumped to £2.3 billion from 1.3 billion. About half was due to a worsening economy and maturing loans.
That took the shine off buoyant results from its investment bank arm, where profits more than trebled to £907 million and income excluding writedowns more than doubled to over £5 billion, driven by growth in the United States after last year’s acquisition of Lehman Brothers’ US operations.
SocGen fell to a quarterly loss of €278 million ($370 million) from a profit of 1.1 billion last year.
Non-recurring items, including the impact of writedowns at its investment banking unit, had a negative impact of €1.9 billion on its earnings.
Its performance was in stark contrast to BNP Paribas, which posted strong results on Wednesday.